Fitch Rates Mylan's Notes Offering 'BBB-'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a 'BBB-' rating to Mylan N.V.'s senior unsecured notes offering.

The company intends to use net proceeds from this offering to finance its pending acquisition of Meda A.B. (Meda) and the refinancing. It will also be used to pay costs associated with the acquisition and refinancing including non-periodic fees, costs and expenses, stamp registration and other taxes. Upon completion of this offering, Mylan intends to reduce the commitments under the bridge credit agreement in an amount equal to the aggregate net proceeds from the offering of the notes.

A list of Mylan's current ratings follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Meda Acquisition Fits Strategically: Fitch views the deal as strategically sound, strengthening Mylan's position in Western Europe while adding new important growth markets, including China, Mexico, and the Middle East. The deal is expected to drive pro forma gross debt/EBITDA to nearly 4 times (x), and absolute debt outstanding is likely to double. But free cash flow (FCF), which is expected to approximate $2 billion in 2016 with solid EBITDA growth expected at Mylan on a standalone basis, should be sufficient to return gross debt/EBITDA to around 3x or below within 18 months of the transaction close.

Diversified, Scaled Operations: Mylan is a well-diversified top-five global generic drug firm. Scale and diversification are important for generic drug companies to maintain stable and durable margins, especially given recent large-scale consolidation of generic drug purchasing groups.

Aggressive Capital Deployment: The failed hostile bid for Perrigo and recently announced acquisition of Meda illustrate management's willingness to aggressively deploy capital for acquisitions. Still, Fitch believes the firm is committed to pursuing leveraging M&A while maintaining investment grade ratings. Fitch expects the firm to actively pursue other acquisition targets over the ratings horizon, including generic and/or branded generic, OTC, and possibly specialty drug makers in the wake of ongoing large-scale industry consolidation. Fitch expects these areas of the global pharmaceutical market to continue to consolidate rapidly during 2016.

Growth, 'Spinversion' Driving De-Leveraging: Gross debt/EBITDA at March 31, 2016 was 2.4x, reduced from 3.6x at year-end 2013. Strong growth from a good product launch pipeline is expected to contribute to EBITDA growth, but debt leverage is unlikely to remain below 3x for at least one year following the Meda deal announcement and to the extent the announced $1 billion share repurchase program is completed.

Favorable Industry Outlook: Fitch's outlook for global generic pharma, particularly the largest players, is generally favorable. Growth opportunities exist through increasing generic penetration in many European markets, aging populations in developed markets, and improving access to healthcare in emerging markets.

EpiPen Losses Delayed: Fitch now expects generic competition to the firm's top-selling EpiPen to be delayed to 2017, at the earliest. Generic substitution will be slower than that of a typical small-molecule product but will likely still dent EpiPen's blockbuster status. Price concessions have staved off share losses to the branded competitor product Auvi-Q, which is currently recalled and may not return to the market.

KEY ASSUMPTIONS

The following incorporate Fitch's assumptions for the Mylan standalone business:

--Double-digit top-line growth in 2016, owing to two incremental months and growth of the Abbott EPD business, the addition of Famy Care, growth in the company's injectables and anti-retrovirus portfolios, and continued strong results from the U.S. business.

--Flat to modestly improving EBITDA margins in 2016 due to better gross margin expectations. Biosimilar launches could improve this assumption.

--Operating cash flows around $2.5 billion in 2016 with capex of $400 million to $500 million, resulting in FCF of $2 billion in 2016.

--Additional smaller M&A transactions, in addition to the $9.9 billion acquisition of Meda, resulting in pro forma gross debt/EBITDA of 3.5x to 4x at year-end 2016. EBITDA growth and term loan reduction expected to reduce gross debt/EBITDA to near 3x by year-end 2017.

RATING SENSITIVITIES

Negative rating pressure would likely be the result of management's abandonment of its relatively recent commitment to operating in the context of investment grade ratings, demonstrated by a willingness to sustain gross debt/EBITDA near 3.5x. Failure to launch meaningful new products, contributing to weaker growth prospects than Fitch currently expects, could also exert negative rating pressures.

An upgrade to 'BBB' is unlikely over the ratings horizon, given the firm's demonstrated willingness to add meaningful leverage to the balance sheet for M&A. Top-line growth and/or margin expansion in excess of Fitch's base case, particularly from successful launches of key products like generic Advair, could contribute to positive ratings momentum in the 2017+ timeframe, depending on capital deployment in the meantime. A commitment to operating with debt leverage near 2.5x could support 'BBB' ratings.

LIQUIDITY

Liquidity is adequate, and FCF is expected to outpace relatively well-laddered debt maturities. Fitch projects FCF to approximate $2 billion in 2016. At Dec. 31, 2015, Mylan had $1.24 billion in cash balances, $1.65 billion availability on its revolving credit facility and $400 million availability on its receivables facility.

FULL LIST OF RATINGS

Fitch currently rates Mylan as follows:

Mylan N.V.

--Long-term IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Mylan, Inc.

--Senior unsecured bank facility 'BBB-';

--Senior unsecured notes 'BBB-'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Nov. 19, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1005341

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160531005977/en/

Fitch Ratings
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W. Madison St.
Chicago, IL 60602
or
Secondary Analyst
Bob Kirby, CFA
Director
+1-312-368-3147
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]

Source: Fitch Ratings

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